Stars Not Aligned

Starwood Property Trust Inc. has about $1 billion of cash to put to work in commercial mortgages, but banks still aren't selling, the newly formed company said in its first financial report.

"We would have thought that the banks would have sold a lot of assets," Barry Sternlicht, the chief executive of the real estate investment trust and former hotel mogul, said during a conference call Monday evening.

Capital has flooded into the REIT sector this year, spurred by expectations that a retreat by banks — which have been bloodied by mounting credit problems — and a lockup in the securitization market would give way to fat margins on real estate assets.

But deal activity has been less than expected so far. Bank regulators recently issued guidance encouraging workouts of commercial real estate loans and said that a decline in collateral value alone is not sufficient to reclassify a performing loan. Sternlicht called the move "unfortunate," and said most of the loan pools the Federal Deposit Insurance Corp. has accumulated through seizures "have not seen the light of day."

Sternlicht, the founder and former CEO of Starwood Hotels and Resorts Worldwide Inc., whose brands include the Sheraton and W Hotels, attributed a slower pace of sales by the FDIC than he had expected to circuit overload brought on by the wave of bank failures.

Day of Reckoning

Despite the lack of action in the bank sector, Sternlicht expressed confidence that Starwood Property can deploy its capital soon enough to make its shareholders happy.

When rates rise, "people will begin to discern risk again," allowing Starwood Property "to deploy capital at rates that will meet our objectives," he said.

"As their balance sheets heal," banks "will begin to take the hits necessary to move some of the loans on their books."

His company is looking at big investments through which it "can put out a lot of capital quickly," and it has a pipeline of potential deals totaling "well over $1 billion," of which about two-thirds involve making new loans.

That doesn't include the hundreds "of inquiries we get that we can shoot in the head right off the bat because the properties don't cover debt service, or they have a tenant leaving in 10 minutes, and then won't cover debt service."

Stephen Laws, a senior analyst of real estate finance at Deutsche Bank Securities Inc., said he lengthened his estimate for the time it would take Starwood Property to build its portfolio by about six weeks, and trimmed his 2010 earnings estimate by 8 cents a share, to $1.84.

But large investments could mean that the "portfolio can ramp faster than my projections," he said, and the yields on Starwood Property's deals to date could mean that his overall return expectations are "a tad conservative."

Starwood Property raised about $921.1 million in its initial public offering Aug. 17. The Greenwich, Conn., REIT is managed by an affiliate of Starwood Capital Group, a private-equity firm founded and controlled by Sternlicht that has about $13 billion of assets under management.

(Starwood Capital led the consortium that bought a 40% stake in the entity that the FDIC set up to take over about $4.5 billion of assets that were not sold to MB Financial Inc. as a part of the resolution of Corus Bank, the condominium construction lender that failed in September.)

Starwood Property said Monday that it had invested about $150 million so far, including a deal for $200 million of commercial mortgage bonds financed with $170 million from the government's Term Asset-Backed Securities Loan Facility.

A Discreet REIT

Sternlicht said the REIT also stands to benefit from asset managers who "are very embarrassed about what has happened to their investments" and want to avoid shopping properties widely.

"Real estate is a great imperfect market," he said. "Guys in those positions don't want to hire a broker to go see 700 people, so there are 700 people talking about them at cocktail parties around the country. So they come to us."

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